Today's Veterinary Business

OCT 2018

Today’s Veterinary Business provides information and resources designed to help veterinarians and office management improve the financial performance of their practices, allowing them to increase the level of patient care and client service.

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62 Today's Veterinary Business VetPartners Corner
Balance Sheet
We hear a lot about P&Ls in veteri-
nary medicine — I will address them
later — but our balance sheets tend
to not get as much attention. Bal-
ance sheets reveal assets, liabilities
and equities. Assets, including cate-
gories like bank balances, inventory
and equipment, are found at the top
of the page and are listed in order
of liquidity. Liabilities follow and
include accounts payable, whether
short term for bills from a vendor or
long term like a mortgage or equip-
ment lease. Equity is the last section
and is a product of all assets minus
all liabilities.
Balance sheets are useful because
they allow us to calculate:
• Current ratio and "days cash
on hand" to evaluate your
ability to meet financial
obligations. Days cash on
hand measures your ability
to make payments when due
by telling you the average
number of days' worth of
expenses you can cover at
any given point. You need
to strike a balance between
having enough cash to pay
your bills each month and
meet unexpected expenses,
but not having so much cash
that you are not utilizing your
assets effectively. For exam-
ple, you might want to invest
extra cash in hiring another
CVT, who will generate ad-
ditional income, rather than
letting the cash sit in your
checking account.
• Debt ratio and debt-to-
equity ratio to evaluate how
effectively you use credit to
finance your operations.
• Return on assets (ROA) to
measure how productive-
ly you use your assets to
generate revenue. It tells you
how many cents of profit you
generate with each dollar of
assets. A higher ROA means
your practice is more produc-
tive. To calculate ROA, divide
net income by the value of
your total assets.
Profit and Loss Statements (P&Ls)
One of my favorite workshops,
whether the audience is composed
of veterinary students or seasoned
practice owners, is a P&L exercise. It
starts by reviewing why profitability
matters and then transitions into dis-
secting real hospital P&Ls to identify
and calculate KPIs and what they tell
us about the health of a clinic.
For those unfamiliar with P&Ls, as
I was early in my career, in their
simplest form they are an income
statement categorizing a business's
revenue and expenses for a given
period. As practice owners, we
should be able to use P&Ls to:
• Identify opportunities to gener-
ate profit by ethically increasing
revenues and decreasing costs.
• Complement our budget by
highlighting areas where ex-
penses need to be tightened
or where additional spending
might benefit the hospital.
• Plan for profits, including sup-
plies, capital investments and
owner return on investment.
VetPartners Corner
In case you missed my August/September article, "Uneasy Street," I examined the difference
between flying by the seat of our pants as practice owners versus leveraging financial statements and key
performance indicators (KPIs) to make educated, intentional management decisions. For those readers ready for
a structured, calculated management process and the benefits it brings, let's pick up where we left off and dive
into some of the tools at our disposal.
By Stith Keiser
While each P&L line gives us some-
thing that could be of value, I tend
to focus on these five primary P&L
KPIs because they often represent
the greatest opportunity for sub-
stantial improvement:
• Gross revenue: The mon-
ey our hospital brought in
during a given period before
any expenses are subtracted.
• Net income: Our practices'
gross income minus expenses.
• Payroll: All the costs of em-
ploying staff, such as wages,
taxes, benefits, uniforms and
continuing education.
• Cost of professional ser-
vices (also known as cost
of goods sold, or COGS):
All expenses associated with
providing the services your
practice offers. Expenses
within the COGS category
include professional services,
pharmacy, laboratory, imag-
ing and radiology, dentist-
ry, ancillary products, and
grooming and boarding.
• Rent or mortgage: Does
not include facility costs.
Upon identifying valuable KPIs on
a P&L, we can begin to benchmark
our numbers with national averag-
es. The percentages below repre-
sent the share of gross revenue.
• Gross revenue: The average
full-time equivalent (FTE)
veterinarian produces roughly
$550,000 to $600,000 a year. In
a three-FTE practice, I'd expect
my doctor-driven gross reve-
nue to be around $1.8 million.
• Net income: 8 to 10 percent
of gross revenue. Top-per-
forming hospitals can see net
income as high as 24 percent.
• Total payroll: Non-DVM
staff, 23.7 percent; DVM staff,
21 percent; taxes and bene-
fits, 6.3 percent.
• Cost of goods sold (COGS):
22.8 percent.
• Real estate/rent:
4 to 6 percent if leasing or
8 to 10 percent if owning.
Key Performance Indicators
I often have practice owners look at
national data and tell me why they
A balancing act
Use KPIs and financial smarts
to drive your practice toward
higher levels of profitability.